Skill Upgrading and Production Transfer within Swedish Multinationals

This paper studies the link between production transfer within Swedish‐headquartered multinational enterprises (MNEs) in the manufacturing industry and skill upgrading in their parent companies in the 1990s. The analysis distinguishes between horizontal and vertical foreign direct investment (FDI). The increased employment share in the affiliates in non‐OECD countries (vertical FDI) has a non‐trivial, significantly positive effect on the share of skilled labor in the Swedish parents. On the other hand, the parents’ skill upgrading is unrelated to employment changes in their affiliates in other OECD countries (horizontal FDI). This is consistent with implications of the newly developed horizontal MNE models.     

FDI and pollution havens: Evidence from the Norwegian manufacturing sector

This is an empirical study of the firm and country determinants of foreign direct investment (FDI) and how it is affected by the stringency of environmental regulations in host countries. We employ disaggregated data on sales by Norwegian multinationals' affiliates from 1999 to 2005 that allow such affiliates to be categorized as either efficiency-seeking (vertical) or market-seeking (horizontal) FDI. While the environmental stringency of a host country and its enforcement are found to have no effect on the average investment, we find a significant negative effect on multinationals with vertical motives. Compared to those located in lenient countries, the efficiency-seeking affiliates in more environmentally regulated countries receive less investment from their parent companies in terms of (i) equity capital, (ii) capital stock, and (iii) assets. We further find that the total exports from affiliates to parent companies in Norway decrease with the level of enforced environmental stringency in the host countries.     

Microeconomic determinants of acquisitions of Eastern European banks by Western European banks1

A considerable number of Western European banks acquired banks in Central and Eastern Europe from the mid‐1990s onwards. The question is whether or not this will improve the efficiency and profitability of the Central and Eastern European banking sectors. We test the relative strength of the efficiency versus the market power hypotheses by investigating the bank‐specific characteristics of the banks involved in the cross‐border acquisitions. We also examine the determinants of the post‐acquisition target banks’ performance. Our results indicate that large Western European banks have targeted relatively large and efficient Central and Eastern European countries (CEEC) banks with an established presence in their local retail banking markets. We find no evidence that cross‐border bank acquisitions in the CEEC are driven by efficiency motivations. The evidence supports the market power hypothesis, raising concerns about the optimal balance between foreign ownership and competition.     

The Effect of Foreign Affiliate Employment on Wages,Employment, and the Wage Share in Austria

This paper estimates the effects of outward Foreign Direct Investment (employment in affiliates abroad) on employment, wages and the wage share in Austria using panel data for the period 1996–2005. There is evidence of significant negative effects of FDI on both employment and wages, and consequently on the wage share. The results are not limited to workers in low-skilled sectors. The negative employment effect is mainly due to the rise in employment in the foreign affiliates in Eastern Europe. The negative wage effects originate from affiliate employment in both Eastern Europe and the developed countries in the industrial sector, but FDI in Eastern Europe has positive wage effects in the services sector due to possible scope effects.     

Foreign direct investment in a world of multiple taxes

Governments impose multiple taxes on foreign investors, though studies of the effect of tax policy on the location of foreign direct investment (FDI) focus almost exclusively on corporate income taxes. This paper examines the impact of indirect (non-income) taxes on FDI by American multinational firms, using affiliate-level data that permit the introduction of controls for parent companies and affiliate industries. Indirect tax burdens significantly exceed the foreign income tax obligations of foreign affiliates of American companies. Estimates imply that 10% higher local indirect tax rates are associated with 7.1% lower affiliate assets, which is similar to the effect of 10% higher income tax rates. Affiliate output falls by 2.9% as indirect taxes rise by 10%, while higher income taxes have more modest output effects. High corporate income tax rates depress capital/labor ratios and profit rates of foreign affiliates, whereas high indirect tax rates do not. These patterns reveal the impact of indirect taxes and suggest the mechanisms by which direct and indirect taxes affect FDI.     

Should countries block foreign takeovers of R&D champions and promote greenfield entry?

Abstract In R&D intensive industries, governments promote greenfield foreign investments, while being sceptical towards foreign acquisitions of domestic high‐quality firms. We develop a theoretical model that shows that foreign acquisitions are conducive to high‐quality targets because of strategic effects on the sales price. However, foreign firms ‘cherry pick’ high‐quality targets to expand R&D rather than to downsize. Otherwise, rivals expand R&D, making the acquisition unprofitable. Thus, our model predicts that acquired affiliates invest more in R&D than greenfield affiliates. Using affiliate data, we find evidence that acquired affiliates have a higher level of sequential R&D intensity than greenfield affiliates.     

Multinational Firms and Plant Divestiture

Multinational firms not only make acquisitions, but also frequently divest affiliates. Affiliate divestiture is the result of many factors, some internal and some external to the firm. Using detailed confidential survey data of Swedish multinationals, we are able to examine divestiture decisions within the context of the world‐wide affiliate network of the firm. In contrast, most existing studies of multinational exit focus on one country only. A model of mergers and acquisitions with financing constraints generates predictions regarding the correlation between affiliate size and the decision to sell. Consistent with this theory, we find that larger affiliates are more likely to be divested, but an increase in relative size of an affiliate reduces the probability of divestiture. Additional network characteristics, the presence of other affiliates nearby and sales of affiliates elsewhere, are also positively correlated with divestiture. We find no support for the notion of footloose multinationals.     

The transfer of workers within multinationals and ownership of foreign affiliates

We study the variation in ownership shares across affiliates of the same multinational firm. Using the micro-level data on foreign affiliates of South Korean multinationals, we construct a proxy for the headquarter intangible asset using transferred Korean workers from the parent to the affiliate. Our results show a strong relationship with the parent ownership share even after controlling for the parent fixed effect. Our empirical evidence thus extends support for the theory on multinational firm boundaries at the micro-level.     

How much profit shifting do European banks do?

This paper studies whether and to what extent the largest and systemically relevant European multinational banks engage in profit shifting to lower their tax burden. We exploit unique data on bank operations reported on a country-by-country basis since 2015 in compliance with European legislation. The dataset contains information on profits, turnover, taxes paid and employment of bank affiliates worldwide, including tax and regulatory havens. In our empirical model, profits shifting incentives are captured through a weighted average of international tax rate differences between all countries where the bank is active. We find that international tax differences trigger the geographical distribution of profits within multinational banks, and that low tax jurisdictions, notably tax havens, attract disproportionately high profits. Our results suggest that, overall, 21% of profits is shifted. Moreover, profits in tax havens are 51% higher than they would be without tax-motivated profit shifting, pointing to a significant reduction of tax bases in high-tax countries.     

The export intensity of foreign affiliates in transition economiesThe importance of the organization of production1

Using a unique database containing trade and industry variables of foreign‐owned companies in the Polish manufacturing industry for the years 1993–2002, we investigate the relationship between the organizational structure of multinational enterprises (MNEs) in Poland and the export structure of their affiliates. We find that labour intensity and foreign control are the main explanatory variables for the export intensity of the affiliates. Given the overall rise in export intensity over the period of investigation, our findings suggest that export‐platform FDI has become a more important mode of organization for multinational enterprises as Poland has evolved into a relatively stable economic environment where MNEs feel comfortable basing their regional operations.     

Diversification and tunneling: Evidence from Indian business groups

We provide evidence suggesting an important yet largely unexplored motive for the diversified structure of emerging economy business groups is to facilitate expropriation of minority shareholders by controlling insiders through tunneling. Using firm level panel data from India, and defining the core firm of a group as the one with the largest asset base, we find that the relatedness of the activity of a group affiliate to the activity of the core firm is correlated with the wedge between control and cash flow rights of insiders as well as with the opacity in insider ownership. Firms with ownership-control wedge lower and ownership opacity higher relative to a group’s core firm are more likely to be in activities unrelated to that of the core firm. Our findings are strengthened by evidence of tunneling in the same direction, from affiliates with wedge equal to or higher than that of the core firm to affiliates with wedge lower than that of the core firm. Taken together this suggests an expropriation motive for diversification: affiliate firms are located away from a business group’s core firm to serve as destination points for funds tunneled from the group’s core.     

Sectoral determinants of foreign affiliate sales employing European data

We test theories on sectoral determinants of foreign affiliate sales employing European foreign affiliate sales statistics (FATS). On the one hand, we test hypotheses that foreign affiliate sales are less likely in sectors with complex tasks and more likely in sectors where communication with customers is important. On the other hand, we test the hypothesis that the force of gravity is stronger in more complex sectors. Employing Poisson and negative binomial estimators, we find support for the first hypotheses and contradict the second hypothesis. We show that the interaction effect between distance and complexity changes sign from negative to positive when complexity is included as a separate regressor. We propose an explanation to reconcile our findings with the basic assertion in the second hypothesis that the force of gravity is stronger in more complex sectors, based on a composition effect between horizontal and vertical affiliate sales.     

CEEC growth projections: Certainly necessary and necessarily uncertain*

In this paper we discuss the necessity for an indirect approach to assess the growth and convergence prospects of ten Central and Eastern European countries (CEEC10). Ongoing structural changes in these countries and the recent European Union membership of eight countries in the sample have to be taken into account in growth projections. Our indirect approach consists of basing growth projections for the CEEC10 on growth equations estimated for the incumbent EU member states. The study improves upon current practice in two ways. First, growth equations are estimated for the EU14 and not on a large heterogeneous panel that includes many countries unrelated to the CEEC10. Second, by means of a variety of equations and scenarios we assess the uncertainty inherent in such projections. We present growth‐rate and convergence time distributions. The mean convergence times are in line with previous findings. The growth‐rate and convergence time distributions are bi‐modal, reflecting the possibility of two distinct growth paths, depending upon economic policy choices.     

Local financial development and constraints on domestic private-firm exports: Evidence from city commercial banks in China

We show that the development of city commercial banks (CCBs) across China has alleviated the constraints from China’s domestic financial-market inefficiency on the export activity of domestic private firms. Considering the export behavior of 260 cities between 1997 and 2012, we confirm the well-established under-performance of domestic private firms in financially more vulnerable sectors compared to foreign affiliates in China. We show that a greater number of CCB branches raises domestic private-firm exports disproportionately more in financially-dependent sectors, which is in line with improved financing conditions for these companies. This improvement in export performance appears to result from both an increase in the number of destination countries and a decline in prices. CCB development is moreover associated with a reduction in the systematic disadvantage of domestic private firms relative to foreign-owned firms in export markets resulting from their greater financial exclusion. We, however, also find that private-firm export performance has deteriorated relative to that of state-owned firms, casting doubt on the ability of CCBs to end the systematic bias of lending in favor of the state sector.     

On the genesis of multinational foreign affiliate networks

Multinational enterprises (MNEs) develop their networks of foreign affiliates gradually over time. Instead of exploring all profitable opportunities immediately, they first establish themselves in their home countries and then enter new markets stepwise. We argue that this behavior is driven by uncertainty concerning a firm's success in new markets. After entry, the firm collects information which is used to update its beliefs about its performance in a market. As conditions in different markets are correlated, the information gathered in one of them can also be used to update beliefs elsewhere – with the degree of correlation depending on issues such as the geographical or cultural distance between markets. This correlated learning may render it optimal to enter markets sequentially – investment in market A is only followed by entry in market B if the firm was sufficiently successful in A. The prediction that firms start their expansion in markets that are closer to their home base and then proceed step by step is supported by our empirical analysis, which features the universe of foreign affiliates held by German multinationals. Based on a rich set of benchmark estimates and sensitivity checks, we identify correlated learning across markets beyond alternative explanations as a key driver of gradualism in the genesis of MNEs' foreign affiliate networks.     

Does it matter where you come from? Vertical spillovers from foreign direct investment and the origin of investors

This study uses firm-level panel data from Romania to examine whether the origin of foreign investors affects the degree of vertical spillovers from FDI. Investors' origin may matter for spillovers to domestic producers supplying intermediate inputs in two ways. First, the share of intermediates sourced locally by multinationals is likely to increase with the distance between the host and the source economy. Second, the sourcing pattern is likely to be affected by preferential trade agreements. In this case, the Association Agreement between Romania and the European Union (EU) implies that inputs sourced from the EU are subject to a lower tariff than inputs sourced from the United States or Canada. This means that on average American investors may have a greater incentive than EU investors to source from Romania and hence present a greater potential for vertical spillovers. The empirical analysis produces evidence consistent with this hypothesis. The results show a positive association between the presence of American companies in downstream sectors and the productivity of Romanian firms in the supplying industries and no significant relationship in the case of European affiliates. The results also indicate that Romanian firms in sectors whose products are expensive to transport benefit more from downstream presence of American affiliates than Romanian firms in sectors with low shipping costs. No such pattern is found for European affiliates.     

Galtonian Regression, Company Age and Job Generation 1986–95

We study the growth of employment at the company level using a very large database of company accounts. More than 31 000 independent companies were studied over 1986–95, though we concentrate on the 8 103 companies which survived throughout the period. We find that smaller companies grew relatively to larger ones in each of the cyclical phases studied, 1986–89, 1989–92 and 1993–95. But their advantage diminished steadily. Despite the negative effect of size on employment growth, and downsizing amongst the largest companies, over half the net new jobs created in survivors were in companies with more than 500 employees.     

Repatriation taxes, repatriation strategies and multinational financial policy

Several investment-repatriation strategies are added to the standard model of a multinational in which an affiliate is located in a low-tax country and is limited to two alternatives: repatriating taxable dividends to the parent or investing in its own real operations. In our model, affiliates can invest in passive assets, which the parent can borrow against, or in related affiliates which can be used as vehicles for tax-favored repatriations. We show analytically how the availability of alternative strategies can effect real investment throughout the worldwide corporation. We use firm level data for US multinationals to test for the importance of alternative strategies. The evidence is generally consistent with the theory, particularly the strategies using related affiliates.     

What Determines the Decision to Implement EMAS? A European Firm Level Study

Empirical research on the characteristics of environmentally responsive companies has focussed on US and Japanese companies. For Europe, which is commonly considered as the greenest of the three major markets, similar research is lacking. This paper seeks to fill this gap by empirically investigating business and financial characteristics, stakeholder pressures and public policies to distinguish companies that have implemented the European Eco-Management and Audit System (EMAS) from a unique firm-level dataset of European publicly quoted companies. We find that the EMAS participation decision is positively influenced by the solvency ratio, the share of non-current liabilities, the average labour cost and the absolute company size as well as the relative size of a company compared to its sector average. The profit margin exerts a negative influence. We further find that companies whose headquarters is located in a country that actively encourages EMAS have a higher probability of participation. Finally, this paper suggests that rather than attracting other kinds of companies, a favourable institutional context succeeds in convincing more of the same kind of companies to participate. The authors thank anonymous referees for providing helpful comments and suggestions on earlier drafts of this paper.     

Productivity spillovers through backward linkages: The role of the origin of investors and absorptive capacity of domestic firms

We argue that multinationals from different home countries have different technologies and input sourcing behavior. These differences impinge on potential productivity spillovers through backward linkages of multinationals and such effects also differ across host local firms depending on their absorptive capacity. Using a panel of Cameroonian manufacturing firms over the period 1993 to 2005, we find supportive evidence of these arguments. There is a negative relationship between the presence of American and European affiliates in downstream sectors and the productivity of Cameroonian firms in the supplying industries and a positive correlation in the case of Asian affiliates. The absorptive capacity of Cameroonian firms mainly explains these divergent results.